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SCHEDULE 20
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TAX RELIEF FOR EXPENDITURE ON RESEARCH AND DEVELOPMENT |
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PART I |
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ENTITLEMENT TO RELIEF |
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Entitlement to R&D tax relief |
| | 1. - (1) A company is entitled to R&D tax relief for an accounting period if-
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(a) the company qualifies as a small or medium-sized enterprise in the period (see paragraph 2), and |
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(b) the company's qualifying R&D expenditure (see paragraph 3) deductible in that period is not less than- |
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(i) £25,000, if the accounting period is a period of 12 months, or
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(ii) such amount as bears to £25,000 the same proportion as the accounting period bears to 12 months.
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(2) For the purposes of sub-paragraph (1) a company's qualifying R&D expenditure is deductible in an accounting period if-
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(a) it is allowable as a deduction in computing for tax purposes the profits for that period of a trade carried on by the company, or |
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(b) it would have been allowable as such a deduction had the company, at the time the expenditure was incurred, been carrying on a trade consisting of the activities in respect of which it was incurred. |
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(3) For the purposes of sub-paragraph (2)(a) no account shall be taken of section 401 of the Taxes Act 1988 (pre-trading expenditure treated as incurred when trading begins).
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(4) In relation to an accounting period beginning before and ending on or after 1st April 2000, the references in sub-paragraph (1)(b)(i) and (ii) to the accounting period shall be read as references to so much of it as falls on or after that date.
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Meaning of "small or medium-sized enterprise" |
| | 2. - (1) For the purposes of this Schedule a "small or medium-sized enterprise" means a small or medium-sized enterprise as defined in Commission Recommendation 96/280/EC of 3rd April 1996.
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(2) The Treasury may by order amend sub-paragraph (1) so as to substitute another definition of "small or medium-sized enterprise" for the definition that is for the time being effective for the purposes of this Schedule.
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Qualifying R&D expenditure |
| | 3. - (1) For the purposes of this Schedule "qualifying R&D expenditure" of a company means expenditure that meets the following conditions.
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(2) The first condition is that the expenditure is not of a capital nature.
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(3) The second condition is that the expenditure is attributable to relevant research and development (see paragraph 4) directly undertaken by the company or on its behalf.
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(4) The third condition is that the expenditure is incurred-
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(a) on staffing costs (see paragraph 5), or |
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(b) on consumable stores (see paragraph 6), |
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or is qualifying expenditure on sub-contracted research and development (see paragraphs 9 to 12).
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(5) The fourth condition is that any intellectual property (see paragraph 7) created as a result of the research and development to which the expenditure is attributable is, or will be, vested in the company (whether alone or with other persons).
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(6) The fifth condition is that the expenditure is not incurred by the company in carrying on activities the carrying on of which is contracted out to the company by any person.
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(7) The sixth condition is that the expenditure is not subsidised (see paragraph 8).
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Relevant research and development |
| | 4. - (1) For the purposes of this Schedule "relevant research and development", in relation to a company, means research and development-
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(a) related to a trade carried on by the company, or |
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(b) from which it is intended that a trade to be carried on by the company will be derived. |
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(2) For the purposes of this Schedule research and development related to a trade carried on by the company includes-
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(a) research and development which may lead to or facilitate an extension of that trade, and |
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(b) research and development of a medical nature which has a special relation to the welfare of workers employed in that trade. |
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Staffing costs |
| | 5. - (1) For the purposes of this Schedule the staffing costs of a company are-
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(a) the emoluments paid by the company to directors or employees of the company, including all salaries, wages, perquisites and profits whatsoever other than benefits in kind; |
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(b) the secondary Class 1 national insurance contributions paid by the company; and |
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(c) the contributions paid by the company to any pension fund (within the meaning of section 231A(4) of the Taxes Act 1988) operated for the benefit of directors or employees of the company. |
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(2) The staffing costs of a company attributable to relevant research and development are those paid to, or in respect of, directors or employees directly and actively engaged in such research and development.
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(3) In the case of a director or employee partly engaged directly and actively in relevant research and development the following rules apply-
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(a) if the time he spends so engaged is less than 20% of his total working time, none of the staffing costs relating to him are treated as attributable to relevant research and development; |
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(b) if the time he spends so engaged is more than 80% of his total working time, the whole of the staffing costs relating to him are treated as attributable to relevant research and development; |
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(c) in any other case, an appropriate proportion of the staffing costs relating to him are treated as attributable to relevant research and development. |
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(4) For the purpose of sub-paragraphs (2) and (3) persons who provide services, such as secretarial or administrative services, in support of activities carried on by others, are not, by virtue of providing those services, to be treated as themselves directly and actively engaged in those activities.
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Expenditure on consumable stores |
| | 6. - (1) For the purposes of this Schedule expenditure on consumable stores means expenditure that would be treated as expenditure on consumable stores in accordance with normal accounting practice.
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(2) Expenditure on consumable stores is attributable to relevant research and development if the stores are employed directly in such research and development.
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Meaning of "intellectual property" |
| | 7. In this Schedule "intellectual property" means-
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(a) any industrial information or techniques likely to assist in- |
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(i) the manufacture or processing of goods or materials, or
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(ii) the working of a mine, oil well or other source of mineral deposits or the winning of access thereto, or
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(iii) the carrying out of any agricultural, forestry or fishing operations;
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(b) any patent, trade mark, registered design, copyright, design right or plant breeder's right; and |
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(c) any rights under the law of a country outside the United Kingdom which correspond or are similar to those falling within paragraph (b). |
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Subsidised expenditure |
| | 8. - (1) For the purposes of this Schedule a company's expenditure is treated as subsidised-
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(a) if a notified State aid is, or has been, obtained in respect of- |
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(i) the whole or part of the expenditure, or
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(ii) any other expenditure (whenever incurred) attributable to the same research and development project;
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(b) to the extent that a grant or subsidy (other than a notified State aid) is obtained in respect of the expenditure; |
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(c) to the extent that it is otherwise met directly or indirectly by any person other than the company. |
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(2) For the purposes of sub-paragraph (1) "notified State aid" means a State aid notified to and approved by the European Commission.
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| | R&D tax relief and R&D tax credits are not State aids for this purpose.
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(3) For the purposes of this Schedule a notified State aid, grant, subsidy or payment that is not allocated to particular expenditure shall be allocated to expenditure of the recipient in such manner as is just and reasonable.
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Qualifying expenditure on sub-contracted research and development |
| | 9. - (1) The provisions of paragraphs 10 to 12 have effect for determining the amount of the qualifying expenditure of a company ("the company") on sub-contracted research and development.
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(2) For the purposes of this Schedule the company incurs expenditure on sub-contracted research and development if it makes a payment (a "sub-contractor payment") to another person ("the sub-contractor") in respect of relevant research and development contracted out by the company to that person.
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Treatment of expenditure where company and sub-contractor are connected persons |
| | 10. - (1) Where-
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(a) the company and the sub-contractor are connected persons, and |
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(b) in accordance with normal accounting practice- |
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(i) the whole of the sub-contractor payment has been brought into account in determining the sub-contractor's profit or loss for a relevant period, and
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(ii) all of the sub-contractor's relevant expenditure has been so brought into account,
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the whole of the payment (up to the amount of the sub-contractor's relevant expenditure) is qualifying expenditure on sub-contracted research and development.
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(2) In sub-paragraph (1)-
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(a) references to the "relevant expenditure" of the sub-contractor are to expenditure that- |
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(i) is incurred by the sub-contractor in carrying on, on behalf of the company, the activities to which the sub-contractor payment relates,
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(ii) is not of a capital nature,
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(iii) is incurred on staffing costs or on consumable stores, and
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(b) a "relevant period" means a period |
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(i) for which accounts are drawn up for the sub-contractor, and
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(ii) that ends not more than twelve months after the end of the company's period of account in which the sub-contactor payment is, in accordance with normal accounting practice, brought into account in determining the company's profit or loss.
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(3) Paragraph 5 (staffing costs) and paragraph 8 (subsidised expenditure) apply for the purposes of determining whether the sub-contractor's expenditure meets the requirements of sub-paragraph (2)(a)(iii) and (iv).
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For this purpose the references in those paragraphs to a company shall be read as references to the sub-contractor.
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(4) Any apportionment of expenditure of the company or the sub-contractor necessary for the purposes of this paragraph shall be made on a just and reasonable basis.
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Election for connected persons treatment |
| | 11. - (1) The company and the sub-contractor may in any case jointly elect that paragraph 10 shall apply to sub-contractor payments made by the company to the sub-contractor.
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(2) Any such election must be made in relation to all sub-contractor payments paid under the same contract or other arrangement.
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(3) The election must be made by notice in writing given to the Inland Revenue.
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(4) The notice must be given before the end of the period of two years beginning with the end of the company's accounting period in which the contract or other arrangement is entered into.
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(5) An election under this paragraph, once made, is irrevocable.
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Treatment of sub-contractor payment in other cases |
| | 12. Where-
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(a) the company makes a sub-contractor payment, and |
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(b) paragraph 10 (treatment of expenditure where company and sub-contractor are connected) does not apply, |
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65% of the amount of the sub-contractor payment is treated as qualifying expenditure on sub-contracted research and development.
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